Making Cents: It's not too late to cut your tax bill

There may be time to cut your income tax bill and either owe less or get a larger refund next year. Let's start with the most obvious: investments that have lost money.

John P. Napolitano

There may be time to cut your income tax bill and either owe less or get a larger refund next year. Let's start with the most obvious: investments that have lost money.

The IRS allows you to take a loss from the sale of losing investments for up to $3,000 against all other income. You can also use losses to offset any gains from the sale of winning investments.

Don't think you have any winners? Take a closer look. Mutual funds are required to distribute gains from within the fund to shareholders each year. While the value of your fund may be lower than it was last year, it may still have some capital gain or income distributions coming to shareholders from interest or sales that the fund made at a profit during the year.

The mutual fund industry is already warning of the potential for substantial taxable distributions to shareholders. You may consider either selling that fund before the distribution is made or making sure that you have ``cashed in'' on other losing positions to offset the possible distributions. You can call or look on the Web site of the funds you own and see what their plan is for year-end distributions. This would only work for mutual funds that you hold in taxable accounts, which would exclude your IRA, 401(k) or other type of qualified retirement plan.

How about contributing more to your 401(k) for the last few weeks of the year or even setting up a retirement plan if you are self-employed? You will get a tax deduction on your 2008 tax return.

To the extent that you invest the money in something that has dropped in value in the last year, you are buying that investment at a much lower cost than someone who bought it a year ago. That, of course, does not guarantee you will reap a greater profit, but at least you're potentially benefiting from a steep discount.

Just taking these ideas and winging it won't cut it. You need to calculate the consequences of the move, and make sure that you're not messing up anything else.

And, of course, there is always the not-so-friendly alternative minimum tax to consider. A good tax preparation software package such as Turbo Tax might help, as would a CPA or financial planner with a detailed knowledge of the tax code.

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com. For online discussion and more information, go to www.makingcentsblog.com.